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Fiscal Truth-Telling from Old-Guard Republicans

Some of the most surprising fiscal truth-telling lately has been coming from Republicans. Not anyone in Congress, but three old guard members of the GOP who don’t bother to disguise their disdain for the tax-cut Kool Aid GOP members of the House and Senate have been drinking.

Take former Fed Chairman Alan Greenspan. You once needed a decoder ring to understand him, but his return to private life has freed him to speak in a way he plainly intends even the dimmest member of Congress to grasp.

Should the Bush tax cuts be extended, as congressional Republicans want? “[Congress] should follow the law and let them lapse,” Greenspan said in an interview with Bloomberg TV on July 16. “Unless we come to grips with this long-term outlook, we are going to have major problems. I think we misunderstand the momentum of this deficit going forward.”

OK, but won’t letting tax rates rise dampen growth?

“Yes it probably will, but I think we have no choice in doing that," Greenspan said. "These are choices between bad and worse.”

Greenspan regularly praised tax cuts when he was Fed chairman. In 2001, he famously gave his blessing to the Bush tax cuts he now says should be allowed to die. The difference then was that he was worried that the Clinton-era budget surpluses were so big that they would pay off the public debt, leaving the government nowhere to invest its surplus tax receipts but in private company stocks and bonds, which Greenspan worried would be improper.

That squeamishness about government investing seems ironic at a time when the government owns 60 percent of GM, and the notion that Congress and President Bush would allow surpluses to persist long enough to pay off the debt seems, well, idiotic now. But at the time it was actually faintly plausible. The forecasted budget surpluses really were huge. Pressed on NBC’s Meet the Press Aug. 1 to repeat what he’d said on Bloomberg TV about the tax cuts he’d once advocated, Greenspan said he was “very much in favor of tax cuts, but not with borrowed money.”

The same day Greenspan went on Meet the Press, former Reagan administration budget director David Stockman had a tough op-ed piece in The New York Times in which he said much the same but more candidly -- ripping Republicans for embracing "the insidious doctrine that deficits don’t matter if they result from tax cuts."

Like Greenspan, Stockman thinks extending the “unaffordable Bush tax cuts” is craziness when the public debt is as big as it is. As he calculates it, the debt will soon hit $18 trillion, a "Greece-scale” equivalent to 120 percent of gross domestic product. Debt of that magnitude “fairly screams out for austerity and sacrifice” and makes it “unseemly” for Senate GOP leader Mitch McConnell “to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.”

The former Republican congressman from Michigan has had a strained relationship with his party ever since he confessed to The Atlantic how he cooked budget forecasts while trying to implement President Reagan’s conflicting orders to cut taxes, increase defense spending and balance the budget.

Stockman came to bitterly resent fellow Republicans who were infatuated with tax cuts but wouldn't compensate for the revenue loss by cutting spending. They made his job impossible. Since then, things have only gotten worse. The "new cadre of ideological tax-cutters," he wrote in the Times, has "hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts."

It’s stating the obvious to note that Greenspan and Stockman have a lot more freedom to say what they think because they are not part of the congressional GOP pack, which enforced its tax-cut orthodoxy about as ruthlessly as the mob keeps its capos in line. But whose fault is this lemming-like devotion to tax cuts, even if these zealots drive the budget over the cliff? If only lawmakers had a way out.

That’s what the third truth-teller, former Reagan administration chief economist Martin Feldstein, is trying to give them. In a fascinating piece in The Wall Street Journal July 20 , Feldstein argues for whacking back the huge thicket of “tax expenditures” that currently cost the Treasury $1 trillion a year in forgone revenue. A tax expenditure is a tax break designed to encourage or reward specific behavior – the way the home mortgage interest deduction ($105 billion a year) encourages people to buy homes, or the income exclusion for employer-paid health insurance ($177 billion a year) makes it cheaper to have health insurance.

There are scores and scores of these tax breaks, which Feldstein says should be thought of as spending programs that operate through the tax code. If the government gave people grants, Republicans would regard that as spending and be willing to cut it. But because these are funneled through the tax code, Republicans “who would vote to cut or eliminate an ordinary spending program therefore won't do so if it is packaged as a tax benefit.”

Feldstein works hard to convince Republicans that it’s okay to scale back tax expenditures, arguing that that would do nothing to raise marginal tax rates or reduce the rewards for investment, saving or risk-taking. “Cutting tax expenditures is not at all like other ways of raising revenue” he gamely contends.

Feldstein doesn’t argue for getting rid of all tax expenditures. And as nice as it would be to pick up $1 trillion a year in new revenue – which would cut this year’s projected $1.4 trillion deficit by almost three quarters -- he’s right. The earned income tax credit is a singularly effective anti-poverty program that’s worth retaining, while the home mortgage interest deduction is a waste of money that merely drives up the price of housing. If the idea behind the mortgage deduction is encouraging home ownership, it should be noted that the home ownership rate in Canada traditionally has been about the same as ours in the U.S., yet Canada has no deduction.

But Feldstein does argue for cutting all these tax expenditures back by at least a third, even the worthy tax breaks. He says that’s what was done as part of the 1986 tax reform, when the value of tax expenditures was reduced from 9 percent of GDP to 6 percent. That seems like a fair way to share the pain.

Maybe some of the members of President Obama’s deficit commission read Feldstein’s piece. Maybe some congressional Republicans read Stockman’s op-ed, or heard Greenspan on TV. Maybe nothing will come of any of this anytime soon. But this is how change begins. And something has to change.